What is a fixed deposit?
A fixed deposit (or time deposit) as defined by Investopedia is:
"A savings account or CD held for a fixed-term with the understanding that the depositor can only withdraw by giving written notice." (CD = certificate of deposit).
In simple terms, a fixed deposit is the money you put with the bank for a fixed term. Typical length of deposit can be as short as 1 day and as long as a couple of years but tenures (length of term) ranging between 1 month to 24 months are common in Singapore's domestic fixed deposit market.
People put money in fixed deposits because it is one of the simplest investments that you can start getting into for unsophisticated investors. In addition, under the new Deposit Insurance Scheme launched by the Monetary Authority of Singapore in 1 April 2006, the deposit insurance scheme will compensate individuals and charities for the first $20,000 of their Singapore dollar deposits in standard savings, current and fixed deposit accounts, net of liabilities, in the event that their bank or finance company fails. Hence, your first $20k is very safe as it is protected under this scheme.
The downside of fixed deposits is that current rates of between 1.5% to 2% mean that your fixed deposits while earning interest, cannot beat inflation projected at 5-6% for 2008. Hence, your real returns (net of inflation) is actually negative. However, other than treasury bills, the unsophisticated investor will find it difficult to find similar riskless investments.
4 comments:
Thanks for sharing your expertise with the public! I am currently a tertiary student and am reading up on financial planning so that I can plan better once I'm working.
I would like to ask for your opinion on money market funds (based on what I know there are several options offered in the market) as an alternative to fixed deposits.
Thank you once again!
Hi Eugene
Money market funds are investments into a pool where the fund manager invests in a basket of deposits, treasury bills, short term commercial paper etc. Individual money market funds invest in slightly different basket of assets but they should be cash or cash equivalents.
These tend to be more liquid than your ordinary unit trusts that invest more in equities and bonds. However, like unit trusts, money market funds may have sales charges when you buy/sell or a spread.
There may also be a annual managers fee for the money market fund.
I would suggest that depending on how much investible savings you have, you may want to invest in your own spread of fixed deposits, treasury bills or even longer term singapore government securities directly as your cost then is lower. But of course if your investible savings amount is small, say $5,000 or less, then you may be better off just putting your money in a treasury bill and letting it grow bit by bit.
Be well and prosper.
Hi PanzerGrenadier,
Thanks a lot for your reply. I'll consider and will read up more in the meantime.
Regards
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